Thanksgiving week was not a good one for US stocks. Bad PMI data in Germany weighed down on the euro and European equities. Time for a rebound?
It was a disappointing week for US stocks. The Dow Jones Industrial Average closed on Friday at 24,286 points to post a whopping 4.4% drop!
The S&P500 lost 3.8% to close at 2,633 and The NASDAQ closed at 6,939 points, marking a weekly drop of 4.3%.
More importantly, here’s how these indices have performed since the beginning of the year:
DJIA: -1.8%, S&P500: -1,5%, NASDAQ: +0.5%. All gains from the beginning of the year have been erased and the year might end in negative territory after nearly a decade-long bull market.
Sentiment last week was affected by tech stocks struggling and earnings starting to disappoint investors during a shortened trading week due to festivities.
Our bearish view on US stock indices was then confirmed, with the ultimate short trade on oil doing wonders, as well as the trade on DAX, which we will analyse later in this article.
So, what now? Are stock indices in the US going to continue in their downside trend?
The week seems to have started with the market willing to ease off some of the selling pressure and futures are pointing to a gap opening up on the US stock market, following the same pattern of European stocks.
There are a few considerations supporting this view, including the fact that we are approaching the end of the year and the markets will attempt to regain positive territory, with institutional investors looking to “embellish” their last quarter performance and avoid disappointing their clients. We are approaching Christmas and New Year, which always carries with them a surge in retail spending, with the possibility that this year, at least in my opinion, the growth in sales will be lower than in previous years.
From a technical point of view as well, we can see hints leading to a rebound.
Let’s look at SP500:
We have a divergence formed on the MACD on an almost aligned double bottom.
Chances are that the price will at least retrace to the 23.6 Fibonacci. This could happen quite fast and should test in conjunction with the short-term dynamic resistance. A breakout at this point would give a stronger signal by targeting a 50% retracement. A long trade can be opened with half the usual volume to tactically trade this long in a bearish situation, with half of the opened position to be brought home at the 23.6 Fibo and the stop moved to break even from below the first meaningful support. Not a great risk-to-reward ratio trade, but worth a try with reduced volume.
The same situation and trade applies to the NASDAQ, but with a slightly better R/R ratio:
Same divergence, same strategy: quick profit home on the 23.6/dynamic and static resistances and stop moved to break even.
Let’s take a look at our ground-breaking shorts, starting from DAX.
Those following us and our Twitter account know we are short on the index since 12,540, and we are still in the game with half of the original position. Our stop is still at 12,200, as we are trading the wider Head and Shoulders formation on the weekly chart, which has a theorical target well below the actual levels. But tactically and technically speaking, it now makes sense to lower the stop to 11,655.
From a fundamental point of view, the standoff between the EU and Italy seems to be easing, with members of the Italian government showing a willingness to start having a dialogue with the EU. It’s not much, but it signals the possibility of avoiding any immediate showdown between the two. Furthermore, over the weekend, the EU 27 approved the draft agreement proposed by UK Prime Minister Theresa May, which indeed secures a lot of the EU’s demands. There is a chance, in fact, that many MPs from Mrs. May’s own party will not like the agreement.
Here is the situation from a technical point of view:
The double bottom on the H4 chart is pretty clear and the strong reaction at the beginning of the week is a clear sign of the market’s will to rebound.
The stop could be lowered just above the break above the nearest static resistance, which happens to coincide with the dynamic one, but we would like to give this trade a bit more breathing space and position the trailing stop right above the nearest highs on H4.
The other homerun has been on Brent. This is really “the trade”. We have been in this short trade since just below 80 and look where we are now: 60.8 at the time of writing!
This trade gave us confirmation of all the concepts that we apply in our trading, write about in our articles, and teach in our training sessions and seminars. I also decided to follow this trade in real time on Twitter, as this trade is really a live masterclass of our trading and money management approach. For those who don’t follow us on twitter, Just look at the following set of tweets:
I am reproducing this here as I have not been able to issue my weekly update for two weeks due to a very tight travel schedule. I apologise for that, and I will try to make sure this will not happen again. The feedback I am receiving from this weekly review is simply overwhelming and I don’t want to disappoint our readers; our fellow traders.
Here is the situation:
We went as low as 64.89 with our stop profit.
From a fundamental point of view, OPEC will meet soon, and there’s a chance they might agree to a cut in production, the size of which will depend on whether they believe that the drop can be stopped simply by production cuts or whether the downward trend is the result of a more structural change in oil demand. Whatever their decision is, it will probably spark a retracement of the downtrend, alleviating the extreme oversold conditions, even on the weekly chart.
We are deep in green territory with this trade, having taken profit twice and changing up our strategy with the trade at a quarter of its original volume.
As such, we will keep our stop at the present level, ready to lower it further if the price keeps moving down, or to consider a reverse tactical trade if the price moves towards testing the wide ex-support area. We will keep you posted!
Now let’s look a look at EURUSD:
Here we have a forming inverse Head and Shoulders pattern, which seems to be confirmed by:
A false breakout of the lower support
The divergence on the MACD.
Still, we will not make a long trade just yet, as it would have an unsuitable risk-to-reward ratio. The target would be the neckline of the forming Head and Shoulders pattern, while the stop should be below the period lows, which would push the R/R ratio below 1.
As such, we’ll wait for a breakout of the neckline. At that point, the pattern will be complete, and we can target far wider profits.
That’s all for this week. From the market news set to hit markets in the coming days, focus should be given to the GDP data in the US. The annualised figure is expected to remain unchanged at 3.5%. Should the actual figure disappoint, USD could get a noticeable hit and volatility might rise both on the greenback and in US stock markets.
Other news items to watch out for are the GDP data in Italy and Canada, as well as PMI data in China, which might offer an insight into the impact of trade wars.
Have a great trading week!